In April 2013, the G20 (1) made a major policy shift in international taxation by endorsing automatic exchange of information as a next global standard for tax information exchanges between states (Communique 2013, para.14). In September 2013, the G20 Leaders expressed their interest in working with the OECD to develop a new multilateral framework on automatic exchange of information and to present a new single standard in early 2014 (G20 Leaders' Declaration 2013, para.51). Within months, the OECD issued a report, which sets out the concrete steps to be undertaken to realize the new global standard (OECD 2013). In February 2014, the OECD introduced the standard entitled "Standard for automatic exchange of financial account information on tax matters" (OECD 2014). In the meantime, the 20 Leaders asked the Global Forum on Transparency and Exchange of Information for Tax Purposes to establish a mechanism to monitor and review the implementation of the new global standard on automatic exchange of information.
The Standard essentially requires financial institutions to take on the role of tax/information agents with respect to non-resident account-holders and in relation to these account-holders' countries of residence. The standard requires financial institutions in participating countries to report information on financial accounts held by non-resident individuals and entities to their local tax authorities on a regular basis. The tax authorities then securely transmit this information to these individuals and entities' countries of residence. Based on the information received, it is then possible for the residence country to verify whether its resident taxpayers have reported their income earned through offshore financial accounts.
The new standard will complement the earlier international tax rules on information exchange "upon request", attempting to address its many limitations (OECD 2009; OECD 2006, para.5). Overall, the new system attempts to address a long-endured problem in international taxation (i.e. offshore tax evasion) and help the states to better enforce their tax laws on the foreign-source income of their residents.
In 29 October 2014, soon after the OECD had introduced the rules of the standard, the representatives of over 51 jurisdictions came together in Berlin to sign a multilateral agreement, the Multilateral Competent Authority Agreement (MCAA), designed to implement the standard (OECD, MCAA 2014). This agreement marks one of the very few multilateral agreements that exist in the field of taxation. The signatory parties pledged to work together towards implementation of the standard by 2017, with the first international automatic exchanges to take place in 2017 (Global Forum, MCAA Signatories 2015).
Of the 140 developing countries around the world, only half a dozen have signed the MCAA (Global Forum, MCAA Signatories 2015). Surprisingly, even the BRIC countries: Brazil, China, India, and Russia, were missing in the signatory list. Further, only a small number of developing countries among another 42 jurisdictions are yet to sign the agreement, but have committed to join the regime by 2018 (Global Forum, Status of Commitments 2015).
This raises an important question: does the emerging international automatic exchange of information regime have anything to offer the developing world? This paper explores and analyses the automatic exchange of information system from the developing country perspective. It also studies the risks of not involving developing countries and the challenges and obstacles that developing countries may confront when participating in the system. Finally, it proposes some options to resolve these challenges.
1.1 Concept and purposes of automatic exchange of tax information
International automatic exchange of tax information generally involves a systematic and periodic transmission of a bulk of tax-relevant information of non-resident taxpayers by tax authorities of one country to the tax authorities of another country where these taxpayers reside (OECD 2012, p.7). The exchange is automatic and occurs on a regular basis and the scope of information to be reported has been agreed in advance, rather than being proceeded following a specific request (Global Forum 2014, p.4). The information is collected in the source country 2 routinely through reporting of third parties (e.g. financial institutions, corporations) who make or administer payments to non-residents.
The OECD Information Brief divides the basic process of automatic exchange of information into 7 separate steps (2012, p.9):
Payer or paying agent of host country collects information from the taxpayer and/or generates information itself. While most tax systems operate in this way, some require the taxpayer to file a refund claim directly to the tax administration. It is from such refund claims that the tax administration may obtain the information to exchange;
Payer or paying agent reports the information to their domestic tax authorities regarding the identity of non-resident taxpayers as well as payments made to them;
The tax authorities consolidate all information received and prepare separate country-bycountry bundles depending on non-resident taxpayers' country of residence;
Information is encrypted and bundles are sent to residence country tax authorities;
Information is received and decrypted;
Residence country feeds relevant information into an automatic or manual matching process;
Residence country analyses the results and takes compliance action as appropriate;
Thus, for example, if a Canadian resident taxpayer holds a deposit of $100,000 in a Swiss bank and that deposit earns 5% interest income annually; the Canadian resident has a foreign-source interest income of $5,000 a year. Automatic exchange of tax information simply means that the Swiss bank reports the income to a relevant Swiss tax authority on a periodical basis (e.g. annually), which in turn transmits this information to the Canadian tax authority (i.e. the Canada Revenue Agency). The transmission generally takes place electronically and directly from the first country's exchange of information portal to the latter country's exchange of information portal. The Canadian tax authorities can then match this information with the one that it has received directly from the resident taxpayer (i.e. submitted through tax return for the period) thereby verifying the latter's accuracy.
The information to be exchanged typically includes the name of the taxpayer, tax identification number (TIN) assigned by the residence country, the taxpayer's temporary and permanent addresses, the type and the amount of income earned for the period, and the details of the payer in the source country. It may also cover other items such as information on financial assets, immovable property, value added tax refund, etc. (OECD 2012, p.7).
The automatic exchange of information system is crucial for countries that tax their residents on worldwide income or assets. The system has a deterrence effect. It encourages resident taxpayers to accurately report their foreign-source income to their countries of residence. The automatic exchange of tax information also ensures equal treatment of domestic and foreign source incomes of the resident taxpayers, thereby eliminating the opportunity for tax-distorted reallocation of economic and financial resources offshore.
1.2 The OECD Standard for automatic exchange of financial account information
The OECD Standard for automatic exchange of financial account information has two main components:
Common Reporting Standard (CRS), which contains the reporting and due diligence rules to be imposed on financial institutions;
Competent Authority Agreement (CAA), which contains the detailed rules on the exchange of the reported information between countries;
The CRS provides a framework on the financial account information to be maintained, collected, and reported by financial institutions to their local tax authorities. It also provides common due diligence procedures to be followed by the financial institutions in identifying reportable accounts and persons.
The CAA, on the other hand, specifies the details which will be exchanged between countries, and when and how such exchanges occur. It contains detailed rules on confidentiality, safeguards and the existence of the necessary infrastructure for an effective exchange system. The OECD introduced the CAA both in bilateral and multilateral versions.
The implementation process of the Standard involves four concrete steps: a) to adopt CRS into domestic law; b) to select a legal basis for the exchange of information and conclude CAA on bilateral or multilateral basis; c) to put in place the administrative and IT infrastructure to collect and exchange information under the Standard; d) to take necessary measures that ensures confidentiality protection and data safeguards for the exchanged information.
Implications of excluding or not including developing countries
2.1 Illicit financial outflows
There is a critical problem that almost every developing country confronts in today's world: illicit financial flows (Kar & Spanjers 2014, pp.iii-iv; Hearson 2014, pp.1-2). Generally, illicit financial flows (IFFs) are defined as capital flows that are illegal in the way they are created, transferred, or utilized (Hearson 2014, p.1). The Global Financial Integrity describes IFFs also as unrecorded money. It describes the unrecorded money as money acquired from corruption, crime such as drug trading, human trafficking, counterfeiting, contraband; and manipulative commercial dealings such as proceeds arising from import and export transactions conducted so as to manipulate customs duties, VAT taxes, income taxes, excise taxes (Global Financial Integrity 2014, p.1). The money leaves the country to hide abroad. The illicit financial flight is a catalyst for tax evasion and...